Deals May Strain On Refco News;

New York Stock Exchange goes public, shares surge

Wed Mar 8, 2006 1:55 PM ET

(Updates share price, adds paragraph on valuation in paragraphs 11-12, detail on Thain, Carter share buys in paragraph 6)

By Megan Davies

NEW YORK, March 8 (Reuters) - The New York Stock Exchange began life as a publicly traded company on Wednesday with a bang, as its stock jumped as much as 18 percent in its market debut.

It marked the end of the exchange's 213-year history as a member-owned club and the beginning of its own membership in the red-hot publicly traded exchange sector.

The NYSE, the world's largest stock exchange, on Tuesday sealed its purchase of electronic rival Archipelago Holdings Inc. and combined the two companies into a new entity, NYSE Group Inc. (NYX.N: Quote, Profile, Research), worth about $11 billion at current market prices.

Interest in NYSE shares was high as trading started, mirroring other strong openings for exchanges going public. The stock rose 18 percent to $76 in early dealings but later pulled back a bit to $74.22, up 14 percent from Archipelago's close at $64.25 on Tuesday.

"The floor reaction was great. You could hardly hear the bell," NYSE Chief Executive John Thain told reporters after ringing the bell to mark the start of trading.

Commenting on investor appetite for the stock, Thain said: "There's a lot of interest right now, and for the long term its for us to demonstrate that there's real value here." Thain and NYSE Chairman Marshall Carter placed the first orders for NYSE stock, buying 100 shares each at $67 a share.

But the ringing of promotional NYSE handbells was not quite enough to drown out a few cries of "boo" from sections of the trading floor. Some uncertainty overhangs the long-term future of a human auction system as cheaper, electronic trading increasingly takes over.

The rise in the share price came as a surprise to some analysts, who had not expected a significant "pop," figuring that the deal had been factored into prices for Archipelago shares. Archipelago surged to $65 from about $17 when the deal was unveiled last April.

"A very strong opening. It's a testament to the work NYSE Chief Executive John Thain has done to bring the exchange into the 21st Century," said Tim Ghriskey, chief investment officer of Solaris Asset Management.

"Now it will be making acquisitions, moving into new lines of business and trading securities of all types."

The exchanges sector has been popular among investors of late, as operators follow a trend of demutualizing and going public. However, the NYSE is trading at one of the richest valuations among its peers, causing some concern that the shares may be overvalued.

Data from IPO-Desktop.com estimates NYSE Group's price to earnings ratio as 110. Based on analyst Richard Repetto at Sandler O'Neill's forecasts, NYSE is currently trading at around 58 times 2006 earnings. In a research note issued prior to NYSE's shares trading on Wednesday, Repetto said he maintained his "sell" rating on the stock and had a 12-month price target of $48.

STRONG INVESTOR INTEREST

Interest in exchanges going public has sent other exchange shares soaring in recent market debuts.

Shares of CBOT Holdings Inc. (BOT.N: Quote, Profile, Research), operator of the No. 2 U.S. commodities exchange, surged nearly 50 percent in their market debut last October; Chicago Mercantile Exchange Holdings Inc. (CME.N: Quote, Profile, Research), the largest U.S. futures exchange, rose nearly 23 percent from their offer price in 2002.

Analysts are awaiting guidance on where the NYSE is headed in order to evaluate its growth prospects.

Combining the NYSE and Archipelago in a public company is a landmark deal that could herald a new, more aggressive culture for the NYSE, which had been run as a members' club since its formation in 1792. The NYSE is now answerable to shareholders and analysts.

Thain said by the end of the year he would look at the issue of bringing the exchange's opening forward from 9:30 a.m. New York time to win some of the trades happening earlier, which could boost its market share by a couple of percentage points.

Thain, who has steered the NYSE public since joining from Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research) in 2004, said he hoped to launch a secondary offering of NYSE shares in the next six weeks.

That would give the NYSE's 1,366 former seat holders -- each seat was swapped for 80,177 shares and $300,000 cash -- a chance to sell some of their shares and increase liquidity in NYSE Group. The former seat holders' shares represent 70 percent of the company's total; converted Archipelago shares represent the other 30 percent.

Thain made no comment about whether the newly listed NYSE Group would cut jobs and costs in order to save money, or raise trading prices on the floor.

The Big Board is expected to push harder into trading assets other than equities. Thain has also made clear his desire to participate in the continuing consolidation of exchanges in Europe.